Wednesday, December 23, 2009

I think this one ought to be preserved for posterity. From an editorial in today's G&M:

Housing is undoubtedly still in demand and interest rates are at historical lows, but there is no agreement that there is a bubble in the market. Canada was spared massive exposure to subprime mortgages, and the American experience is helping inform bank prudence north of the border. Meanwhile, Canadians are largely succeeding at keeping up with standard mortgages, despite the economic downturn; their capacity to meet future obligations will only increase once the downturn ends.

Moreover, Canada's regulatory regime is already doing well at keeping Canadians solvent and in their homes. Unlike in the United States, homeowners do not get tax deductions on their mortgage interest payments. The era of the no-money-down mortgage has faded in Canada.

It is certainly true that free-money fueled housing bubbles don't create problems for banks until they pop. But what may be less true is the contention that this one won't pop.

And BTW, why should banks be prudent when they unload the sucker mortgages on the taxpayer through CMHC?

It is stunning that so many people are blind to what is going on--when we have right in front of us in the US a giant example of what happens when you give free money to people to spend on houses. Hint--it doesn't end well.

Monday, December 21, 2009

Think of Canada’s housing market as a ticking time bomb. Think of Finance Minister Jim Flaherty as the unlucky bomb disposal expert called in to deal with the problem.

Flaherty is moving slowly — oh, so slowly — to snip a wire here and there in an attempt to defuse the mess.

Problem is, the ticking is getting louder by the minute.If the bomb explodes, home prices could plunge. In the worst case, plunging prices could bring on an economic downfall such as the United States, Ireland and Spain suffered after their real estate markets collapsed.

But to make Flaherty’s challenge even more difficult, he still has to convince most people the bomb even exists. At the moment, he’s being cautious in how he describes the problem. He’s being even more cautious in how he deals with it. Perhaps too cautious.

Flaherty told Canwest News Service last week that he’s monitoring the real estate market and is ready to intervene if it reaches “irrational” levels. The Finance Minister says he may require homebuyers to put down higher down payments. He may also force them to amortize their mortgages over shorter periods.No doubt these are excellent ideas. But Flaherty has already tried them.In July 2008, he made his first tentative move to defuse the housing sector by requiring homebuyers to put down at least 5% of the purchase price of a home.

At the same time, Flaherty reduced the maximum amortization period on home mortgages to 35 years from the previous limit of 40 years.

His cautious strategy accomplished absolutely nothing. The Canadian Real Estate Association reported the resale price of an average Canadian home hit $337,231 in November, up a stunning 19% from a year earlier.

If a red-hot real estate market during the brutal recession of the past year doesn’t meet Flaherty’s definition of an “irrational” market, it’s difficult to know what would.

Yes, interest rates are historically low, but any rational homebuyer has to realize interest rates will inevitably rise. When that happens, many homeowners will face much larger mortgage payments.Canadians appear unshaken by the risk of higher rates, perhaps because home prices have doubled over the past decade and many buyers assume more gains lie ahead.It is difficult, though, to come up with a rational explanation of why home prices should climb from here.

Canada’s population growth has been nothing extraordinary. Wage increases have crawled. The supply of new homes has surged and the level of home ownership stands at a four-decade high. Meanwhile, Canadians are aging, which suggests the pace of household formation should be slowing down.

So why are homes still being bid higher? It seems to come down to the widespread conviction that a house is a great investment.

History suggests this is true only sporadically. Robert Shiller, the Yale economist who warned of both the dot-com bubble and the U.S. housing bubble, has accumulated a mountain of data to demonstrate that the price of a home in the United States over the past century has barely beaten the rate of inflation.

Piet Eichholtz, a professor of real estate finance at Maastricht University in the Netherlands, came to a similar conclusion when he studied real estate prices in an Amsterdam neighbourhood from 1628 to 1973. He found that home prices required 350 years to double in real terms.

If you assume home prices should rise in line with inflation, you come to a dire outlook for Canadian real estate. Taking figures from 1990, 1995 and 2000, and boosting them by inflation during the intervening years, suggests the national average home price should check in around $200,000 — a third less than the current figure.

More sophisticated calculations arrive at similar estimates. David Rosenberg, chief economist at the money manager Gluskin Sheff in Toronto, examined home prices in relation to personal incomes and residential rents. He concluded that prices are between 15% and 35% above levels that are consistent with fundamentals.“If being 15% to 35% overvalued isn’t a bubble, then it’s the next closest thing,” he writes.

So what can Flaherty do? He’s already missed the opportunity to defuse the real estate bomb at an early stage. He’s understandably reluctant to raise interest rates when the recovery is still tentative.

He should follow through on his vows to increase down payment requirements and shorten amortization periods. Most important, though, he should loudly caution Canadians on the dangers of taking on more mortgage debt when home prices seem unsustainably high. After all, when a bomb disposal expert can’t do anything else, he can at least warn people to run for cover.

Financial PostIan McGugan is a freelance business journalist who writes for the Financial Post.

It all seems like all anyone really has these days is Confidence. We wouldn't want real profits or growth, or sustainable behaviours; would we?

Every day that goes by, I get more of the distinct impression that big chunks of the economy are part of a confidence game that resembles at best, blind faith and at worst, a giant swindle.

In relation to our local real estate market, to me, it resembles the giant swindle, with realtors and mortgage brokers taking advantage of the uninformed masses who place great 'faith' in the value of real estate ownership. They are blindly pursuing ownership at all costs with little or no thought to the immense risks they are taking on by putting themselves into massive amounts of debt. with little or no money down. We shouldn't come down too hard on the realtors and mortgage brokers though, since they are providing a service to willing consumers and they are just do their darndest to get that eager debtor the right amount of financing and the house they they just 'have to have'.

I actually put the blame squarely on the government and inappropriate rules that fail to guard the CMHC and hence taxpayers from massive losses in the future. After all, requiring a 10% downpayment is so 1999. Perhaps a speculator tax and extended ownership requirements for principle residence capital gains tax exemption (currently 12 months) would be appropriate rule changes too. After all, in countries with these sorts of rules, home ownership isn't a confidence game based on ever increasing home values and massive debt burdens but rather an appropriate personal and financial choice based on financial sustainability and lifestyle preferences.

Friday, December 11, 2009

In today’s Breakfast with Dave, Rosie discusses the Canadian housing market:

It sure looks that way. At a time when personal income is down around 1% in the last year, we have seen nationwide average home prices soar 21% and last month hit a record high, as did sales. In real terms, home price appreciation is back to where it was in 1989. Of course, back then, interest rates were far higher but then again, the economy was in the late stages of a phenomenal multi-year economic expansion, not making a transition from deep recession to nascent recovery.

While the Canadian economy is recovering, overall growth is still barely above zero as manufacturers grappled with excess inventories, a strong currency and a soft domestic demand picture south of the border. Employment conditions have improved, but are hardly that healthy, as we saw in the November jobs report where wages and the workweek were both down despite a constructive headline number (half of which were in the education sector, an inherently difficult area for statisticians to adequately seasonally adjust).

In answer to the question as to whether prices are in a bubble, all we will say is that when we ran some models showing Canadian home prices normalized by personal income or by residential rent, what we found is that housing values are anywhere between 15-35% above levels we would label as being consistent with the fundamentals. If being 15% to 35% overvalued isn’t a bubble, then it’s the next closest thing. We are talking about 2-3 standard deviation events here in terms of the parabolic move in Canadian home prices from their lows. So if it walks like a duck …

Thursday, November 26, 2009

A smaller but still robust monthly rise

Canadian home prices in September were down 1.8% from a year earlier, according to the Teranet-National Bank National Composite House Price Index. It was the tenth consecutive 12-month decline, but the 12-month decline has been diminishing steadily since it peaked at 6.9% in May. The reason is that September was the fifth straight month in which the index reading for Canada as a whole was up from the month before. The September monthly rise of 1.3% was the smallest in four months but still vigorous. The vigour is consistent with an improvement in market conditions over 2009 to date - more homes have been selling and fewer have been coming on the market.

Teranet – National Bank National Composite House Price Index™

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For the first time in three months, prices were down slightly from the month before in one of the six metropolitan markets surveyed, Montreal (−0.2%). This decline was not due to a deterioration of market conditions. According the Greater Montreal Real Estate Board, home sales were up from a year earlier in every month from May to October while new listings have declined. Toronto prices were up 1.5% from the month before, the smallest increase since the April bottom but still substantial. If October shows the same rise, Toronto prices will be back to their peak of August 2008. As for the other four markets, the September monthly rises were 2.1% in Vancouver, 1.1% in Calgary, 0.9% in Ottawa and 0.6% in Halifax.

The continuing 12-month deflation of the composite index (−1.8%) is attributable to three of the six markets: Calgary (−5.4%), Vancouver (−5.1%) and Toronto (−1.0%). In the other three markets, prices were up from a year earlier: Ottawa (3.4%), Montreal (2.9%) and Halifax (1.7%).

The Teranet–National Bank House Price Index™ is estimated by tracking observed or registered home prices over time using data collected from public land registries. All dwellings that have been sold at least twice are considered in the calculation of the index. This is known as the repeat sales method; a complete description of the method is given at www.housepriceindex.ca

The Teranet–National Bank House Price Index™ is an independently developed representation of average home price changes in six metropolitan areas: Ottawa, Toronto, Calgary, Vancouver, Montreal and Halifax. The national composite index is the weighted average of the six metropolitan areas. The weights are based on aggregate value of dwellings as retrieved from the 2006 Statistics Canada Census. According to that census1, the aggregate value of occupied dwellings in the metropolitan areas covered by the indices was $1.168 trillion, or 53% of the Canadian aggregate value of $2.207 trillion.

All indices have a base value of 100 in June 2005. For example, an index value of 130 means that home prices have increased 30% since June 2005.

Tuesday, November 24, 2009

This paper uses a small-open economy model for the Canadian economy to examine the optimal Taylor-type monetary policy rule that stabilizes output and inflation in an environment where endogenous boom-bust cycles in house prices can occur.

The model shows that boom-bust cycles in house prices emerge when credit-constrained mortgage borrowers expect that future house prices will rise and this expectation is neither shared by savers nor realized ex-post. These boom-bust cycles replicate the stylized features of housing-market boom-bust cycles in industrialized countries. In an environment where mortgage borrowers are occasionally over-optimistic, the central bank should be less responsive to inflation, more responsive to output, and slower to adjust the nominal policy interest rate.

Friday, November 20, 2009

A potentially significant ruling in the BC courts was released last week that could have some significant implications for home inspectors. The ruling is not long by legal standards but still pretty dry. Don't read it if you have a life. I read it twice. You can read the briefer press coverage here.

The suit was between a home owner (the plaintiff) who made an offer on a property in North Vancouver subject to inspection and hired an inspector (the defendant) for $450 to inspect the home, and write and present a report on his findings. This is pretty standard practice, especially with older homes, and especially especially with older homes with significant structural and leaking issues, which this particular property had, and was evident even by a cursory walk-through.

Long story short, the home inspector lost the case and was ordered to pay over 192 fat ones to the owners, covering the the majority of repair costs to the house. The house had significant structural deficiencies that cost significant money to fix. The fixes included compacting soil holding the foundation, rebuilding two decks, and reinstalling supporting post and beam members that had significant rot.

A few things were made clear by this case -- and it may still be appealed, not necessarily on the bill of the home inspector -- and I'll highlight a few points that we all should take seriously when buying a property.

1. The inspector was recommended by the Realtor

The first thing to note was that the inspector was recommended to the buyers by their Realtor. Certainly the Realtor purports to have his clients' best interests at heart yet the Realtor only gets paid if the sale completes. The inspector undoubtedly was recommended by this Realtor in other transactions so there is potential for conflict of interest. The judge did not us this fact in issuing the final decision. Still, ensuring the chances of a conflict of interest are minimized could have saved this case from happening at all.

2. Seeing what you want to see

While the blame was put solely on the inspector, I am suspicious the judge ruled against him partly because of his conflicting testimony under oath. The judge made, in my opinion, a slightly bizarre determination that the buyers put significant faith in the inspector's report, enough to believe the repair costs were on the order of $20K, not the eventual $200K. I'm not a lawyer so cannot comment on how the buyers' state of mind would influence whether negligence occurred.

If we think back to 2006 and the overall sentiment of the market, prices were increasing at close to 20% year-over-year. The house was purchased in the late spring, a typically strong month for sales. In those heady days, it was not uncommon for buyers to attend scores of viewings, make several offers on several properties, and if they're lucky have one accepted. With that as the backdrop to this particular purchase, I am suspicious the buyers put significant pressure on themselves to complete. Often we put blame on Realtors, inspectors, lawyers, and others in the industry, claiming they influence buyers to complete so the food chain gets paid. Well sure, but there still needs to be the obvious precondition to influence: the buyers allow it to happen, and some buyers' emotional states make influence all the simpler.

3. Will this change anything

I don't want to over hype this particular case -- it may have been a case of negligence without further implications. In the extreme we could imagine home inspectors, now wary of the chance of successful litigation against them, start hedging on the side of caution when writing a report. It could mean fewer sales as buyers get cold feet.

There is little in the way of standards for the home inspection industry. There are some standards and codes of conduct, however there does not seem to be wide acceptance they are adequate for all inspection scenarios. In this case, an "expert" home inspector testified how the baseline guidelines of one such association are considered inadequate for a proper inspection. To properly set up home inspection standards is a huge effort and, given the variance in homes across the country, it would be difficult to write down in standards form that completely encapsulates common sense and competence. I would expect such a standard is years off.

In the meantime we as potential buyers are stuck relying on ourselves to make a call on whether a house inspection makes sense. From what I've read in this case, it did not. In the heat of buying frenzies -- and we are in the midst of one now -- it is important to be extra cautious when we know our emotions are involved. It also highlights the risks involved in home purchases and why carrying costs, on average, should have a healthy margin of error.

Wednesday, November 18, 2009

File this article under: "No Shit Sherlock" and to beat all it is significantly worse in Vancouver.

November 12, 2009, Tony Wong, Business Reporter - Toronto Star

Low interest rates have caused some Canadians to act "irrationally" in the housing market, potentially taking on too much debt that could lead to economic difficulties down the road, says the president and CEO of ING Direct Canada.

"You have situations in some markets such as Toronto where people are making multiple offers for homes, they are paying thousands more and waiving conditions. It gives me concern they may not be thinking rationally, and this could lead to problems," Peter Aceto said in an interview Wednesday.

"Canadians are also paying their homes off slower and slower, and the concern for me is that they are buying more house than they can really afford."

Aceto said he is so concerned about the market that he has instructed staff to advise customers not to go with longer-term amortizations if they can help it. More than 50 per cent of all mortgages in Canada this year were amortizations longer than the standard 25 years, says Aceto.

As a result, the lender said he is worried that some consumers are biting off more than they can chew.

"It's almost as if Torontonians feel very concerned they are missing something with such low rates." said Aceto. "The problem is: can they afford to pay for their mortgage five years from now, when interest rates go back up?"

Sales of existing homes in the Toronto area were up 64 per cent in October from the same time last year, while average prices hit a record $423,559, up 20 per cent. Bidding wars have become common in choice neighbourhoods.

Bank of Canada Governor Mark Carney has already expressed concern that an asset bubble may be forming. And other financial community heavyweights such as CIBC World Markets senior economist Benjamin Tal told the Star last week that consumers are "blinded" by low interest rates.

However, Aceto is the first bank president to express concern over the housing market.He acknowledged that his comments will likely not be popular with money lenders since he is also in the business of selling mortgages. "What I do know is that we shouldn't be focused on the short term," he said

"We shouldn't be interested in just selling mortgages to get our numbers up for the next quarter. If banks help our customers make the right financial decisions, then we will have a healthy and happy consumer and economy. It just makes sense."

Aceto's former job at ING was chief risk officer. He spent two years in California during the height of the real estate bubble, and felt that Canadians would not be as spendthrift as their American counterparts. But when he arrived back in Canada he was surprised to see that some consumers were acting in a similar way.

"Canadians have been proud internally that we're very different than the Americans in the way we behave in terms of our spending habits and the way we deal with credit. But over time we have become a lot closer than we think," said Aceto.

For consumers with 35-year amortizations, which ING sells, he advises that they accelerate their payments.

"That way if you have a $300,000 mortgage, instead of owing $280,000, maybe you only owe $200,000 when rates are higher. It prepares you for difficult times," said Aceto.

Despite his concerns, Aceto maintained that the Canadian economy is in much better shape than the U.S., where zero-down and longer amortizations created a massive housing bubble. And he said the Canadian government has done a good job in limiting long-term amortizations to 35 years.

"The banking system is much more sound, but that doesn't mean we should be complacent," he said.

Strong demand has led to a steady rise in Greater Vancouver home prices compared to last year.

Over the last 12 months, the MLSLink® Housing Price Index (HPI) benchmark price for all residential properties in Greater Vancouver increased 6.8 per cent to $553,702 from $518,668 in October 2008.

"While home prices have been rising in 2009, they have not eclipsed the peaks reached in early 2008," Scott Russell, Real Estate Board of Greater Vancouver (REBGV) president said. "We're coming off several months of unseasonably high sales levels, which has allowed for a gradual increase in home values this year,"

The REBGV reports that residential property sales in Greater Vancouver totalled 3,704 in October 2009, an increase of 4.1 per cent from the 3,559 sales recorded in September 2009, and an increase of 171.6 per cent compared to October 2008 when 1,364 sales were recorded. Looking back two years, last month's sales increased 22.3 per cent compared to October 2007 when 3,028 sales were recorded.

New listings for detached, attached and apartment properties in Greater Vancouver totalled 4,977 in October 2009. This represents a 2.3 per cent increase compared to October 2008 when 4,867 new units were listed, and a 13.4 per cent decline compared to September 2009 when 5,764 properties were listed on the Multiple Listing Service® (MLS®) in Greater Vancouver.

At 12,084, the total number of property listings on the MLS® decreased 4.1 per cent in October compared to last month and declined 37 per cent from this time last year.

Sales of detached properties increased 201.6 per cent to 1,487 from the 493 detached sales recorded during the same period in 2008. The benchmark price, as calculated by the MLSLink Housing Price Index®, for detached properties increased 7.7 per cent from October 2008 to $749,808.

Sales of apartment properties in October 2009 increased 148.4 per cent to 1,607, compared to 647sales in October 2008. The benchmark price of an apartment property increased 6.3 per cent from October 2008 to $380,975.

Attached property sales in October 2009 are up 172.3 per cent to 610, compared with the 224 sales in October 2008. The benchmark price of an attached unit increased 4.6 per cent between Octobers 2008 and 2009 to $468,798.

Wednesday, October 28, 2009

OCTOBER 2009

A second consecutive month of price rises in all survey markets

Canadian home prices in August were down 3.4% from their pre-correction peak of August 2008, 12 months earlier, according to the Teranet-National Bank National Composite House Price Index. It was the eighth consecutive 12-month decline, but the 12-month decline has been diminishing steadily since it peaked at 6.9% in May. The reason is that August is the fourth straight month in which the index reading for Canada as a whole has been up from the month before. The August rise of 2.0% was particularly vigorous. It was the second month in a row in which prices were up from the month before in all six of the metropolitan markets represented in the index. This turnaround is consistent with an improvement in market conditions in the first half of 2009 - more homes have been selling and fewer have been coming on the market.

Teranet – National Bank National Composite House Price Index™

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The monthly rises in August were 2.7% in Toronto, 2.0% in Calgary, 1.7% in Vancouver, 1.5% in Ottawa, 1.2% in Montreal and 0.6% in Halifax. For Toronto it was the fourth consecutive rise of 2% or more, taking the cumulative gain to 9.4% in just four months. By way of comparison, Montreal showed a sixth consecutive rise but the cumulative six-month gain was only 4.8%.

In the three easternmost markets, Montreal, Halifax and Ottawa, August prices were above the pre-recession peak. Toronto prices are now down only 3.0% from their August 2008 peak. Vancouver prices are still down 7.7% from their June 2008 peak and Calgary's are down 12.9% from their peak of August 2007, two years earlier.

The Teranet–National Bank House Price Index™ is estimated by tracking observed or registered home prices over time using data collected from public land registries. All dwellings that have been sold at least twice are considered in the calculation of the index. This is known as the repeat sales method; a complete description of the method is given at www.housepriceindex.ca

The Teranet–National Bank House Price Index™ is an independently developed representation of average home price changes in six metropolitan areas: Ottawa, Toronto, Calgary, Vancouver, Montreal and Halifax. The national composite index is the weighted average of the six metropolitan areas. The weights are based on aggregate value of dwellings as retrieved from the 2006 Statistics Canada Census. According to that census1, the aggregate value of occupied dwellings in the metropolitan areas covered by the indices was $1.168 trillion, or 53% of the Canadian aggregate value of $2.207 trillion.

All indices have a base value of 100 in June 2005. For example, an index value of 130 means that home prices have increased 30% since June 2005.

Teranet - National Bank House Price Index™ thanks the author for their special collaboration on this report.

1 Value of Dwelling for the Owner-occupied Non-farm, Non-reserve Private Dwellings of Canada.

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"About the time everybody's walking around complacently, congratulating each other—"We've sure got it made! Now we can take it easy!"—suddenly everything will fall apart. It's going to come as suddenly and inescapably as birth pangs to a pregnant woman."